[OPE-L:849] Valuation of Inputs & Moral Depreciation

John R. Ernst (ernst@pipeline.com)
Wed, 24 Jan 1996 22:40:43 -0800

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Fred,

Good to hear that you are having fun down there. It would seem
as though when one stays out late, one may experience not only
physical depreciation but "moral depreciation" as well.

Here, let me take issue with the part of your post concerning
moral depreciation and skip the first part -- "Anticipating
Results" -- for now. First, let's consider the matter
as a problem in a competitive capitalism where prices fall.
Second, let's return to Marx and look at the help he provides.

A. As a Problem

1. No matter how we compute md, the question is how do we
account for it. Let's take the case of the machine that
can be replaced more cheaply. That is, if I buy a machine
for 10000 today, and, if the price of replacing it,
continually falls, how do I represent the "moral depreciation"
of that machine in the c+v+s framework. Or do I bother?
That is, why not be an economist and continually recompute
the prices it every time it can be produced more cheaply?

Or, do we economists sneak in moral depreciation only when
it occurs and subtract it from profit? If so, one is
forced to ask-- How and why the actors, in this case the
capitalists, remain unaware of the phenomenon? Here, they
need no nothing of value to note that the price of the
machine is dropping.

2. It does seem to me that devaluations could be sudden and totally
unanticipated. Here capitalists do suffer a loss and this
loss has to be considered as a deduction from s.

3. On the other hand, if the losses are continual in the
sense that they occur with some regularity, then prior
to investing in new process, the capitalist must
consider them. Again, for the capitalist, to compute
the return to capital assumes that all the capital
invested returns.

4. No matter how the devaluations occur, sudden and unexpected
or regular and anticipated, the lifetime of fixed capital
is shortened.


B. As We Find it in Marx

1. Quote 1


You begin by citing Marx and later consider the footnote to the
passage where he introduces the idea of "moral depreciation."
Here let's put the thing back together.

In addition to the material wear and tear, a machine also undergoes what
we might call a moral depreciation. IT LOSES EXCHANGE-VALUE, either
because machines of the same sort are being produced more cheaply, or
because machines of the same sort are entering into competition with it.
*
In both cases, however young and full of life the machine may be, ITS
VALUE IS NO LONGER DETERMINED BY THE NECESSARY LABOR-TIME ACTUALLY
OBJECTIFIED IN IT, BUT BY THE LABOR-TIME NECESSARY
TO REPRODUCE EITHER IT OR THE BETTER MACHINE. IT HAS THEREFORE BEEN
DEVALUED TO A GREATER OR LESSER EXTENT.
(C.I. 528; Penguin ed.; emphasis added.)

*The 'Manchester Spinner' already referred to
enumerates, as part of the cost of machinery,
"an allowance for the deterioration of machinery."
"It is also intended," he says, "to cover the loss
which is constantly arising from the superseding
of machines before they are worn out, by others
of a new and better construction."

You claim that the first two sentences of the text support your
position and then commenting on the footnote state:

"I agree that this passage does say that capitalists do try to anticipate

future innovations and that capitalists make an allowance to cover future

losses due to such innovations. But it does not say exactly how this
allowance is made. Specifically, it does not say that this allowance is
made
by reducing the expected lifetime of the machine and increasing the
annual
depreciation charges accordingly. Another type of allowance is to set up
a
'reserve fund', which is a one-time deduction from profit, with the
annual
depreciation charges remaining the same. It is not clear from this
passage
which type of allowance the Manchester spinner made or which type of
allowance Marx intended to infer."

In citing that same Spinner that we see in the CAPITAL
footnote above, we find Marx quoting him more extensively
in the Collected Works (Vol. 33, pp 372-73). In referring
to what appear to be annual costs, he explains the annual
depreciation charge of 1,200.

"...It is also intended to cover the loss which is constantly
arising from the superseding of machines before they are
worn out by others of a new and better construction."

In other words, the same quote.

At this point, I am not concerned about the time frame capitalists
give themselves to recover the losses due to "moral depreciation" --
one year or several. The basic idea is that they do. As you note,
they could take the charge completely in one year or spread it out
over several. But clearly, again, if the machine costs 1500 and
if they need to charge 100 for normal wear and tear, the value
of the machine would be recovered in 15 periods. If the moral
depreciation is 500 and they spread that over 10 years we are back to
my example. If, on the other hand, they take the charge at first as
a reserve fund, they would still have the 1500 invested back after
10 years. By anticipating "moral depreciation" capitalists attempt
to recover the funds invested in a shorter period of time than they
would if no moral depreciation were anticipated. Hence, the
difference between n and n* in equations (1) and (2) below. Let's
turn to that algebra in your post.


You begin this part of the post by representing the annual
depreciation charges.

Fred says:

(1) d = P / n

where d is the annual depreciation charges,
P is the price of previously produced means of production
and n is the expected lifetime of the means of production.

John says:

Here, I think the key is "expected lifetime of the means
of production." Is "moral depreciation" assumed or not?

You then go on

Fred says:

Alternatively, the depreciation charges of this machine - WITH
"moral depreciation" (as defined by John) - is determined
according to equation (2):

(2) d* = P / n*

where n* is the shorter expected lifetime due to "moral depreciation"
and d* is the greater annual depreciation charges also due to "moral
depreciation".

According to this interpretation, the quantity of "moral
depreciation" (md), is given by:

(3) md = d* - d

John says:

You then contrast that with what you call Marx's definition of
moral depreciation

Fred says:

This definition of moral depreciation (which I argue was Marx's
definition)
may be expressed algebraically as:

(4) md = P - P*

where P is the price of the means of production at the time they were
purchased and P* is the current (lower) price of these means of
production.
Compare this definition of moral definition with John's definition
(equation 3).

John says:

It seems to me that in (4) you are calling md the total
of moral depreciation over the life of the machine whereas
in (3) md is the amount recovered by the capitalist in a
given period. Thus to get the md in (4), I would multiply
the md in (3) by n*.

How then do we differ on this matter? I think, given capitalists'
expectations of "moral depreciation", I claim that it like other
types of depreciation is recovered over the economic life of
the fixed capital. You seem to suggest that the entire amount of
"moral depreciation" is to be deducted from profit in the first
period.

2. Quote 2

Fred says (quoting Marx):


Finally, as is the case throughout large-scale industry, moral
depreciation
also plays its part. After ten years have elapsed, it is generally
possible
to buy the same quantity of carriages and locomotives for $30,000 as
previously cost $40,000. A DEPRECIATION OF 250N THE MARKET PRICE thus

must be reckoned with on this material, even if there is no depreciation
in
use-value. (C.II. 250; Penguin ed)


Fred continues:

It seems to me that this passage says that moral depreciation is the 25%
decline in the price of the carriages and locomotives, the same
definition
given in the other passage just discussed. Nothing is said in this
passage
about capitalists anticipating innovations and calculating higher
depreciation charges over a shorter life span.

John says:

Stop. Stop. What is the life span of that capital to which Marx
refers? Note it is not wearing out. All Marx seems to be saying
is that even if it didn't wear out, there is a moral depreciation of
$10,000 over ten years. Hence, the capitalists had better have
collected $10,000 in that same period of time. That would be a
depreciation charge of $1000 per year even though there is no
physical deterioration of the use value involved.


3. Quote 3 (Yours)

Fred says:

I have come across another passage from the Theories of Surplus-Value
which clearly supports my interpretation that Marx assumed that the price
of
previously produced means of production is determined by the current
reproduction costs and not by actual historical costs.

"The value of this part [constant capital] reappears, it is reproduced in

the product. In what proportion it enters into the value of the whole
product depends entirely on its actual magnitude - provided the
productivity of labor does not change; but however, the productivity may
change, this part of the constant capital will always have a definite
magnitude...

AS A RESULT OF THIS INCREASING PRODUCTIVITY OF LABOR, HOWEVER, A PART
OF THE EXISTING CONSTANT CAPITAL IS CONTINUOUSLY DEPRECIATED IN VALUE, FOR
ITS VALUE DEPENDS NOT ON THE LABOR-TIME THAT IT COST ORIGINALLY, BUT ON
THE LABOR-TIME WITH WHICH IT CAN BE REPRODUCED, AND THIS IS CONTINUOUSLY
DIMINISHING AS THE PRODUCTIVITY OF LABOR GROWS. (TSV.II. 415-16; emphasis
added)

John says:

I do not see how this proves your point. All agree that
as productivity increases, the value of constant capital
falls. Since this means falling prices, under Marx's
assumptions, it would mean that the constant capital
depreciates in terms of price.


______________________


Between us, I suppose the main issue is the manner in which
capitalists compute the value of constant capital as technical
change takes place. Further, how they recover their investments
as they make profits is an issue.



John